First Union Corp. agreed Wednesday to buy The Money Store Inc. for $2.1 billion in a move that would enable the big banking company to establish a coast-to-coast presence in the consumer home-equity and small-business loan industries.
The purchase of Money Store for $34 a share not only would make First Union one of the nation's largest providers of home-equity and Small Business Administration-backed credit, it also lets the bank "fill an important gap in meeting the credit needs of a broader range of customers," said John Georgius, president of Charlotte, N.C.-based First Union.
The Money Store, based in Union, N.J., has 4,800 employees operating out of 172 branches and call centers in all 50 states. Its biggest center is in Sacramento, where it employs about 2,000 people. The deal with First Union calls for Money Store to keep its 31-year-old name and its senior management, including Chief Executive Marc Turtletaub.
Money Store is a leading "subprime lender," meaning it makes many home-equity, SBA and student loans to consumers with spotty credit records who might not qualify for the loans from commercial banks.
That business, which includes levying above-par interest rates to compensate for the borrowers' added risk, has been exceptionally profitable for Money Store and others in recent years. Money Store in particular has grown on the strength of an advertising campaign featuring Hall of Fame baseball star Jim Palmer as pitchman.
But during the last 12 months--as consumers of all stripes have become more savvy about refinancing their loans or changing lenders to take advantage of lower interest rates--Wall Street has grown increasingly wary about the subprime lenders' future profit growth.
Money Store saw its stock plunge more than 25% in the last quarter of 1997 after another big subprime lender, Green Tree Financial Corp., was forced to take huge charges because its way of accounting for previously recorded earnings proved too optimistic and aggressive.
Money Store's stock plunge was so severe that last month the company puts itself up for sale to enhance its stockholders' returns--even though its earnings (excluding one-time charges) have continued to grow briskly.
In response to First Union's bid, Money Store's stock jumped $4.25 a share to $31.75 on Wednesday, while First Union's stock fell 75 cents to $52 a share in New York Stock Exchange composite trading.
Other subprime lenders are feeling the pinch of consumers' changing credit habits. Beneficial Corp., a major consumer-finance company, also put itself up for sale last month, and more consolidation in the industry is forecast.
Stocks of other consumer-finance firms rose sharply in response to the First Union-Money Store announcement. They included ContiFinancial Corp., up $2.06 to $29.38 a share, and FirstPlus Financial Group, up $2.81 to $36.56 a share.
So why buy these lenders? As the successful bidder for Money Store, First Union would gain not only Money Store's earnings strength but also strategic benefits, said Harold Schroeder, an analyst at Keefe, Bruyette & Woods, an investment firm that specializes in financial stocks.
First Union is a banking powerhouse that in November announced plans to buy CoreStates Financial Corp. of Philadelphia for $16.1 billion in the biggest banking deal in U.S. history.